Friday, November 29, 2013

Why Markets Prepare for Thanksgiving and Christmas

“And all of it
testifying to the power of the free market — to Adam Smith’s world-changing
insight from 1776, which holds that if a man simply is left free to pursue
“only his own gain,” then “he is in this, as in many other cases, led by an
invisible hand to promote an end which was no part of his intention” — namely,
the gain and good of society as a whole.

Today, we Americans remain largely free
to pursue our own interests. The invisible hand, through its still-mysterious
alchemy, smelts the base metal of that effort into 24-carat societal gold.”

Comment

This time last year I reported on Lost
Legacy on an initiative in our local Butcher shop in respect of the Christmas
turkey market that mirrored the annual thanksgiving in the US celebrations
regarding how retail shoppers can be assured that turkeys are ready in sufficient
numbers for consumers expecting to find them in their local shops for these festivals in which demand is expected to be higher than normal.

Well, this week I placed our family’s order
for a 16lb (I still don’t understand kilo’s) turkey to be delivered for
collection by myself.It’s my
family’s “tradition” that I handle the ordering, pay for it, and deliver it to
the chosen 'chef' on 23rd December in time for serving on 25th December – NB: my
key role is the paying for it!

Thanksgiving in the US is usually accompanied by articles across the media celebrating aspects of the “miracle”
of the market economy, by which they mean that a totally free market guarantees
the appropriately certain delivery of turkeys to suit all tastes across the
country, as it supposedly does for every other product that consumers wish
and pay for it to happen.

This “miracle” is down to the mystical
“invisible hand”, credited to Adam Smith, and which remains true today in that
it happens annually without fail, because “self-interested” producers so
arrange their affairs to make it happen, which benefits the public
interest.It follows that if
governments tried to do the same they would fail miserably.

I do not argue with the last bit about
governments as economic managers.I do argue with the first bit, specifically that it is a “miracle” of an
“invisible hand”. Markets, however, work by human actions and visible price signals.No producer in the supply chains needs
“an invisible hand” to prompt them to act in their regular anticipation of a popular sales
event.If they can’t get that
right they will soon learn and adapt their behaviour or they will go out of
business.Given the dates of major
events are known year on year and they are incentivised by the consequences of
not anticipating what everybody else knows, especially their potential
customers, who direct their purchases by their own experience and by their
family’s anticipation (children know when it’s a birthday or an annual
celebratory feast which generates expectations – other kids learn and share
what they know with other kids), it is not surprising that their excitement spreads such
knowledge.

So the two sides of the market are
present: sellers act to secure future sales and buyers act to anticipate future
consumption.In all this I cannot
see what role there is for a mysterious “invisible hand”, certainly not a
“guiding” or “intentional” spiritual entity that nobody can explain, except
those given to theology.

Some slide over this superfluous
requirement for an “invisible hand” by associating it with Adam Smith to give
it credibility, without realising Smith did not assert that the IH metaphor applied
to “markets”, “prices”. “supply and demand”, “unintentional consequences”, or
whatever else they imagine.He
used the metaphor in his two (only) examples to described the “invisible”
motives that caused the identified persons to act and those actions had
consequences which the actors neither intended nor even necessarily thought
about.The consequences were
unintended.

For the turkey farmer he knows when he
can sell an abundance of turkeys over the regular number throughout the year
(in Scotland its at Christmas and in the US its at Thanksgiving ad Christmas). Hence they
act to adjust their supply chains accordingly.

The “proud and unfeeling
landlord” in Adam Smith’s example feeds his labourers each day because unless he does so, no amount of coercion can force dying labourers to labour after a few days without food.By feeding them his farmlands are laboured upon which is what he
intended.But also by feeding them
the “proud and unfeeling landlords” unintentionally enable the labourers to
procreate their children and the population increases.

Smith’s point of his metaphor is that
this long-term outcome is unintended though the landlords' motivation to secure short-term
labour is invisible (we cannot see into the minds of
others).That is why Smith
described the role of metaphors is to “describe in a more striking and
interesting manner” their “object” (Smith on "Rhetoric and Belles Lettres"). In the case of landlords he used the IH metaphor in
“Moral Sentiments” (1759). Moreover, in this example there were no “markets”,
“prices” or whatever in play.

These alleged meanings were added in the
20th century in popular economic discourse and teaching.Nobody while Smith was alive, nor from
1790 to 1875, mentioned or hinted about the modern invented meaning.

Tom states it thus: "world-changing insight from 1776, which holds that if a man simply is left free to pursue “only his own gain,” then “he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention” — namely, the gain and good of society as a whole".

The merchant is actually led by his motive, in the case Smith describes metaphorically in a "more striking and interesting manner", the merchant's feelings of insecurity if he trades abroad, to invest "domestically". There is no "invisible hand" guiding him - its metaphor - and certainly he is not "led by an invisible hand" to cause "unintended consequences" (how would an "invisible hand" intentionally cause "unintended consequences? Does it have foresight too?). The self-interests of merchants need not, and throughout history, have not been benign (Enron, and etc., anybody?). Add in what Smith called the "vile rulers of mankind" and the suffering of slaves, serfs, and powerless people, and the truth of Smith's humanitarian remarks, and the myth of automatic benignity is exposed.

I suggest that Tom Dennis and most modern economists are wrong in
their strong beliefs in the invented notions of “invisible hands” in their
associating such ideas to Adam Smith.

And Tom's rhetorical flourish of "still-mysterious alchemy, smelts the base metal of that effort into 24-carat societal gold” is starkly inappropriate as a generalisation.

2 Comments:

Curious what you think Adam Smith would make of today's enthusiasm around social impact strategy (see Michael Porter http://www.ted.com/talks/michael_porter_why_business_can_be_good_at_solving_social_problems.html) and even "social intrapreneurship" (see http://www.intrapreneurshipconference.com/social-intrapreneurship-the-new-frontier-for-social-innovation-in-companies/)?

What would Adam Smith make of the rise of social intrapreneurship (see http://www.intrapreneurshipconference.com/social-intrapreneurship-the-new-frontier-for-social-innovation-in-companies/) and social impact strategy (see Michael Porter http://blog.ted.com/2013/10/06/porter_sandel_debate/). Do you agree that one can either take the Adam Smith route and say that in a perfect market to seek profit is in fact also the best way to serve the greater good OR one can say that social goals should be explicit (not Smiths invisible hand of the market) then then adopt a social mission and forget profit based business models. Does mixing the two just mean you will do both badly>